Deciphering the month-end noise
“He who sleeps in continual noise is wakened by silence” – William Dean Howells
In another relatively light day for data, foreign exchange markets were dominated by month and quarter-end fixing demand yesterday. In most currencies a rationale can be made for a demand and supply based on relative fixed income and equity index rebalancing and ultimately, apart from a general demand for JPY (which took USDJPY and other JPY crosses lower) the fixing ‘bark was worse than its bite’.
Overnight, demand for JPY continued. (Is this an opportunity to get short JPY?) Recent weakening of US rates, after a significant break higher in recent weeks, has added some momentum to the JPY buying as weak shorts were squeezed.
Comments from Bank of Japan (BoJ) board member Miyao yesterday that the “Feb 14th action helped weaken yen, boost stocks” (in reference to the BoJ move towards inflation targeting and effectively quantitative easing) and that “more BoJ easing could amplify [the] policy effect” suggest that weakening the JPY is not just a by product of quantitative easing designed to stimulate demand through rising prices, but is an active policy goal. In addition to this, US rates should continue to be supportive of a shift back towards JPY as the markets' funding currency of choice.
The latest news flow from China seems to suggest that concerns over the growth trajectory are valid. Suggestions of weaker output and weaker profit growth will continue to weigh on the region's equity markets and likely the AUD.
In the UK - despite the weaker revision to the Q4 GDP data, and some survey suggestions that wage pressures are building and that inflation may be more persistent and more stubborn than anticipated - there were elements of good news in the data. Business investment showed some signs of life in the revisions, and as I have been suggesting for some time now, the huge cash piles (around GBP750 billion, circa 50% of UK GDP) of UK corporates could spur a much stronger and faster recovery in the UK if sufficient confidence can gain momentum.
For the rest of the day sentiment is likely to be shaped by the outcome of the Italian 5 and 10 year bond auctions, where it is hoped that the liquidity that has been provided to the European banking sector via the LTRO’s will be ‘put to work’. Elsewhere month and quarter end flows will likely also play a part in today’s proceedings.
The news headlines around the London close last night that the EU aid ceiling was to be raised to EUR940 billion (for the first year and then EUR 700 billion subsequently) failed to give the EUR a significant boost, perhaps suggesting that the market has shifted its attention away from the size of the firewall (at least as long as peripheral bonds are not under any pressure) and towards the growth prospects for the zone. In this regard I continue to favour EUR weakness, particularly on the crosses. The Copenhagen talks tomorrow bring the potential for EUR volatility, and despite the inactivity of the last few days, 1 month EURUSD volatility (which is at its lows in over a year) might begin to offer good value.